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Posted Jan 2, 2024

The future of fintech

As a founder of Bond Street, an early fintech company acquired by Goldman Sachs in 2017, David Haber, now a General Partner at investing giant Andreessen Horowitz (a16z), believes a16z’s strength in the venture space is driven, in part, by its unique ability to combine entrepreneurial and investment skills. In an exclusive interview with Juniper Square, Haber described the firm’s investment approach and shared his perspectives on the fintech sector—the exciting opportunities driven by gen AI, the urgency of increased efficiency in an era of high-interest rates, and a rising awareness among large companies of the benefits startups provide.

Investing at a16z

a16z roared onto the venture capital scene in 2009, led by its two founders, Marc Andreessen (co-developer of the Mosaic browser and co-founder of the Netscape browser) and Ben Horowitz (co-founder of software company Loudcloud), making statements like “Software is eating the world” and, more recently, that “AI will save the world.” Influenced by its founders, the firm has focused on entrepreneurship in its investment approach. Haber explained that this philosophy manifests as “a willingness to tear things down and rebuild if it's not working, a willingness to take risks, and a willingness to build a team and an organization.”

Haber also shared how he combines his experience as an investor and an entrepreneur and believes that building a team is the most critical part of building a company. “I’m really investing behind people at the end of the day. My job is identifying the most ambitious and most talented people in the world.”

Building a compounding competitive advantage

Building an investment firm, Haber says, requires achieving two linked goals. The first must be delivering exceptional returns. The second, though, is the source of compounding competitive advantage.”

Haber points to his first employer after college as an example of this concept. This organization started as an LLC with a pool of capital used to purchase income-generating pharmaceutical royalties, mainly from universities that had funded the development of the drugs but needed an organized approach to managing the resulting cash flows. The LLC purchased the assets for their discounted cash flows and grouped them, acquiring more with leverage based on the income. Eventually, the firm acquired the royalty streams of a few drugs that became hugely successful. These cash flows allowed the firm to achieve scale and reduce its financing costs for future acquisitions. Moreover, the business model was complex enough to dissuade competitors. After it went public, the company could raise even less expensive debt, allowing further expansion.

This type of model, Haber notes, appears in many successful multi-platform financial services firms, including Apollo Global and Goldman Sachs. He went on to apply it at Bond Street.

The evolution of fintech

In 2013, Haber worked for Spark Capital. There, he has two breakthrough insights. “First, many young, profitable companies had trouble finding financing because they weren’t a fit for VC but couldn't get bank loans. Second, the actual workflows of processing small business loans hadn’t changed in 50 years, although much of this data was becoming available online.”

Working with his co-founder, Bond Street applied technology to speed up and generally improve the credit decision process for small businesses. This concept, automating traditional banking operations through technology, was part of the first wave of fintech.

Now, Haber says, “Fintech cuts across everything. Companies that have succeeded in the subscription model of the SaaS world are layering in financial products, whether payments or lending or insurance. It all drives engagement and long-term value from the customer base.”

Fintech is evolving again as it is applied more broadly to streamline all workflows within financial services. “There’s a huge opportunity to improve the efficiency of internal workflows,” Haber explains. “Juniper Square is an example: it provides the private markets with an infrastructure that helps GPs and LPs manage their relationships. Moreover, large financial institutions are increasingly aware that many of the technologies they’ll need going forward needn’t be built in-house. Instead, they can be addressed more quickly by third-party firms. So that’s an exciting opportunity for startups.”

The rise of generative AI

Haber is an unapologetic techno-optimist, especially with respect to Generative AI. “I’ve heard that the last decade was about putting a bank in everyone’s pocket, and this new decade will be about putting a banker in everyone’s pocket,” he says. This change will come from finding clever ways to embed large language models (LLMs) into existing workflows, thus improving customer experiences.

In his view, the intersection of Gen AI and financial workflows offers a rich source of efficiency improvements. One exciting area is investment research, where employees synthesize large amounts of data from various sources. Gen AI could pull the data together and flag exceptions, allowing staff to focus on the unique cases.

Another area is the ability to query large databases to improve risk assessment efficiency and speed for investment products or borrowers. Haber says, “I think we’ll see lots of new user experiences for consumers and small to medium-sized businesses that will reduce the complexity of their financial lives and democratize access to advice.”

Higher interest rates can spell opportunity.

Haber doesn’t believe that the current era of high interest rates is a death knell for fintech. Opportunities abound for companies that can reduce internal costs or friction within financial institutions—automating the business loan evaluation and performance tracking process, simplifying the regulatory and reporting processes for regional banks, providing analytics to help bank CFOs better understand their balance sheets, and optimizing trading portfolios are all areas where innovation solves enormous problems.

But part of success stems from communication. Large companies—potential partners, customers, acquirers, or investors—often don’t know that startups are working on solutions to their challenges. Haber often finds himself building bridges between fintech startups and the large incumbents:

Even when a startup is in the ideation phase, they should identify the big problems that incumbents are facing because a startup can become a giant company that way. The large institutions aren’t spending a lot of time studying the industry’s frontier. So, my colleagues and I try to understand the problems the big incumbents are facing and then connect them to the startups we see all the time. And they may not be our portfolio companies—after all, we only invest in about one of every 100 companies we see. But those 99 are still good companies! They just don’t fit within our parameters. So we try to link them to the big companies whose challenges they’re addressing.

Making these connections adds value in a number of ways. By increasing his knowledge of large companies and their needs, Haber can better understand the companies he wants to invest in and reach conviction about potential investments faster. In addition, it builds connections through the ecosystem, allowing for reference checks, recruiting, and just bouncing ideas off experts. “Besides,” Haber admits,” I really enjoy playing matchmaker like this.”

The time is now

Haber notes that an important question for both an entrepreneur and an investor to ask is, “Why now?” His background gives him a unique perspective to ask and answer that question. In the new environment, with higher interest rates (even if the Federal Reserve eases off next year), as large institutions contend with a rapidly changing world and startups develop new ways to deploy cutting-edge technology, the combined insights of investors and entrepreneurs will create a host of exciting opportunities.